U.S. POSTAL SERVICE

Health and Pension 

Benefits Proposals 

Involve Trade-offs

Statement of Frank Todisco, Chief Actuary

Applied Research and Methods

John E. Dicken, Director

Health Care 

Testimony

Before the Committee on Homeland 

Security and Governmental Affairs, 

U.S. Senate

For Release on Delivery

Expected at 10:00 a.m. EDT

Thursday, September 26, 2013

GAO-13-872T

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-13-872T, a testimony 

before the Committee on Homeland Security 

and Governmental Affairs, U.S. Senate

September 26, 2013

U.S. POSTAL SERVICE

Health and Pension Benefits Proposals Involve 

Trade-offs

Why GAO Did This Study

USPS continues to be in a serious 

financial crisis, with little liquidity in the 

short term and a challenging financial 

outlook in the long term as profitable 

First-Class Mail volume continues to 

decline. Critical decisions by Congress 

are needed on postal reform legislation 

that has been proposed in both the 

U.S. Senate and the House of 

Representatives. Various proposals 

would restructure the financing of 

postal retiree health benefits, including 

required payments to prefund these 

benefits; enable USPS to introduce a 

new health plan for postal employees 

and retirees; and restructure the 

funding of postal pensions, including 

addressing a potential surplus in 

funding postal pensions under FERS. 

GAO has previously testified that a

comprehensive package of legislative 

actions is needed so that USPS can 

achieve financial viability and assure 

adequate benefits funding for more 

than 1 million postal employees and 

retirees. GAO has also previously 

reported on various approaches 

Congress could consider to restructure 

the funding of USPS retiree health 

benefits and pensions.

This testimony discusses (1) funding 

USPS retiree health benefits; (2) 

USPS’s proposal to withdraw its 

employees and retirees from FEHBP 

and establish its own health plan; and

(3) a potential surplus in funding postal 

pensions under FERS. This testimony 

is based primarily on GAO’s past work.

 

What GAO Found

GAO has reported that Congress needs to modify the U.S. Postal Service’s 

(USPS) retiree health benefit payments in a fiscally responsible manner. GAO 

also has reported that USPS should prefund any unfunded retiree health benefit 

liability to the maximum extent that its finances permit. Deferring funding for 

postal retiree health benefits could increase costs for future ratepayers and 

increase the risk that USPS may not be able to pay for these costs. Key 

considerations for funding postal retiree health benefits include:

• Trade-offs regarding USPS’s current and long-term financial condition: One 

rationale for prefunding is to protect USPS’s future viability by paying for 

retirement benefits as they are being earned. However, USPS currently lacks 

liquidity to fund required payments for prefunding retiree health benefits. To 

the extent prefunding is postponed, larger payments will be required later, 

when they likely would be supported by less First-Class Mail volume. No 

prefunding approach will be viable unless USPS can make the payments. 

• Possible consequences to USPS employees and retirees: Fully funded 

benefits protect against an inability to make payments later and make 

promised benefits less vulnerable to cuts.

• Allocating costs between current and future ratepayers: Deferring payments 

can pass costs from current to future postal ratepayers. Allocating costs 

among different generations of ratepayers is complicated by the unfunded 

liability that was not paid for in prior years.

• Funding targets: An 80 percent funding target for postal retiree health 

benefits would effectively lead to a permanent unfunded liability of roughly 20 

percent. An option could be to build in a schedule to achieve 100 percent 

funding in a later time period after the 80 percent level is achieved.

GAO has reported that USPS would likely realize large financial gains from its 

proposal to withdraw its employees and retirees from the Federal Employees 

Health Benefits Program (FEHBP) and establish its own health plan. According 

to USPS’s estimates, these financial gains would significantly reduce its health 

benefits expenses and eliminate its unfunded retiree health benefit liability—with 

increased use of Medicare by retirees comprising most of the projected liability 

reduction. USPS also has projected that its proposal will increase Medicare 

spending. As Congress considers proposals for a USPS health care plan, it 

should weigh the impact on Medicare, which also faces fiscal pressure, and other 

issues, including establishing safeguards for assets of the USPS health plan and 

ensuring protections for plan participants are comparable to those in FEHBP. 

GAO has also reported on key considerations regarding the release of any 

Federal Employees Retirement System (FERS) surplus to USPS. First, estimates 

of retirement benefits liabilities contain a significant degree of uncertainty and 

can change over time. Second, returning surpluses whenever they develop 

would likely result in an eventual unfunded liability. Alternative options to address 

funding surpluses include reducing USPS’s annual FERS contribution either by 

amortizing the surplus over 30 years (which would mirror the treatment of 

deficits) or by offsetting the contribution against the full surplus each year until 

the surplus is used up. 

View GAO-13-872T. For more information, 

contact Frank Todisco at (202) 512-2834 or 

todiscof@gao.gov or John E. Dicken at (202) 

512-7114 or dickenj@gao.gov.
Page 1 GAO-13-872T

Chairman Carper, Ranking Member Coburn, and Members of the 

Committee:

We appreciate the opportunity to be here today to discuss U.S. Postal 

Service (USPS) benefit issues in the context of proposed postal reform 

legislation. USPS continues to be in a serious financial crisis, with little 

liquidity in the short term and a challenging financial outlook in the long 

term as profitable First-Class Mail volume continues to decline. Members 

of this Committee have recently introduced comprehensive postal 

legislation that would, among other things, restructure the financing of 

postal retiree health benefits, including required payments to prefund 

these benefits; authorize USPS to collectively bargain with its unions to 

introduce a new health plan for postal employees; and restructure the 

funding of postal pensions, including addressing a potential surplus in 

funding postal pensions under the Federal Employees Retirement System 

(FERS).1

This testimony is based primarily on our past work through July 2013 that 

examined USPS’s financial condition and benefits. We have previously 

reported on (1) funding USPS retiree health benefits; (2) USPS’s proposal 

to establish its own health plan outside of FEHBP and (3) funding postal 

pensions including addressing a potential surplus in funding postal 

pensions under FERS.

In addition, USPS and others have offered proposals in these 

areas. This testimony will focus on issues related to (1) funding USPS 

retiree health benefits; (2) USPS’s proposal for its own health plan 

outside of the Federal Employees Health Benefits Program (FEHBP) and 

(3) funding postal pensions including addressing a potential surplus in 

funding postal pensions under FERS.

2

 1 S. 1486, 113th Cong. (2013).

This testimony is based on work that was 

conducted in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

2 GAO, U.S. Postal Service: Proposed Health Plan Could Improve Financial Condition, but 

Impact on Medicare and Other Issues Should be Weighed before Approval, GAO-13-658

(Washington, D.C.: July 18, 2013); U.S. Postal Service: Status, Financial Outlook, and 

Alternative Approaches to Fund Retiree Health Benefits, GAO-13-112 (Washington, D.C.: 

Dec. 4, 2012); U.S. Postal Service: Allocation of Responsibility for Pension Benefits 

between the Postal Service and the Federal Government, GAO-12-146 (Washington, 

D.C.: Oct. 13, 2011); U.S. Postal Service: Strategies and Options to Facilitate Progress 

toward Financial Viability, GAO-10-455 (Washington, D.C.: Apr. 12, 2010).
Page 2 GAO-13-872T

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives. Each of the reports cited 

in this testimony provides detailed information on our scope and 

methodology.

As table 1 shows, at the end of fiscal year 2012, USPS had $96.1 billion 

in unfunded benefits and other liabilities: $63.5 billion in unfunded 

liabilities for retiree health and pension benefits, as well as $15.0 billion in 

outstanding debt—the statutory limit—and $17.6 billion in workers’

compensation liabilities. These liabilities have become a large and 

growing financial burden, increasing from 83 percent of USPS revenues 

in fiscal year 2007 to 147 percent of revenues in fiscal year 2012.

Table 1: Selected USPS Liabilities and Unfunded Pension and Health Benefit Liabilities, Fiscal Year End 2007 through 2012

(Dollars in 

billions) 

Fiscal Year Liabilities

Unfunded retiree 

health benefit and 

pension liabilities

Outstanding debt at 

the end of the fiscal 

year

Workers’

compensation 

liabilities

Unfunded liabilities 

for retiree health 

benefits

Unfunded CSRS 

liabilities 

(surplus)a

Unfunded FERS 

liabilities 

(surplus)a Total

2007 $4.2 $7.7 $55.0 $3.1 $(8.4) $61.6 

2008 7.2 8.0 53.5 3.3 (8.8) 63.2 

2009 10.2 10.1 52.0 9.6 (6.8) 75.1 

2010 12.0 12.6 48.6 7.3 (6.9) 73.6 

2011 13.0 15.1 46.2 (1.7) (11.4) 61.2 

2012 15.0 17.6 47.8 18.7 (3.0) 96.1 

Source: USPS.

a The Civil Service Retirement System (CSRS), which became effective on August 1, 1920, 

established a retirement system for certain federal employees. It was replaced by the Federal 

Employees Retirement System (FERS) for federal employees who first entered covered service on 

and after January 1, 1987. Pension and retiree health projections are sensitive to the economic and 

demographic assumptions used and can fluctuate from year to year due to actual economic and 

demographic outcomes (such as investment returns, salary increases, and mortality) being different 

than those predicted by the assumptions, and to changes in the assumptions themselves.

USPS’s dire financial condition makes paying for these liabilities highly 

challenging. In the short term, USPS is in a financial crisis, has reached 

its $15 billion statutory borrowing limit, and lacks liquidity to fund needed 

capital investment. USPS has not made legally-required payments of 

$11.1 billion to prefund retiree health benefits and does not expect to 

make its required prefunding payment of $5.6 billion due at the end of this 

Background
Page 3 GAO-13-872T

month. In the long term, USPS will be challenged to pay for its liabilities 

on a smaller base of profitable First-Class Mail. First-Class Mail volume 

has declined 33 percent since it peaked in fiscal year 2001, and USPS 

projects this volume will continue declining through fiscal year 2020.

The Postal Accountability and Enhancement Act (PAEA) established the 

Postal Service Retiree Health Benefits Fund (PSRHBF) and required 

USPS to begin prefunding health benefits for its current and future postal 

retirees, with annual payments of $5.4 billion to $5.8 billion from fiscal 

years 2007 through 2016.3 Subsequent USPS payments are required to 

be based on an actuarial approach to funding through fiscal years 2056 

and beyond.4 USPS has made a total of $17.9 billion in prefunding 

payments since the prefunding schedule began in fiscal year 2007, with 

the most recent prefunding payment that was made being for $5.5 billion 

in fiscal year 2010; a total of $33.9 billion in required prefunding payments 

remain from the 10 years of fixed payments. USPS’s $5.5 billion retiree 

health benefit payment requirement that was originally due at the end of 

fiscal year 2011 was delayed until August 1, 2012.5

 3 Pub. L. 109-435, § 803, 120 Stat. 3198 (Dec. 20, 2006), codified at 5 U.S.C. § 8909a.

USPS missed that 

payment, as well as the $5.6 billion payment that was due by September 

30, 2012. USPS has reported that due to a low level of available cash, it 

will be unable to make its $5.6 billion payment due by September 30, 

2013. The required prefunding payments that USPS does not make are 

reported as outstanding liabilities in USPS’s financial statements. Looking 

forward, USPS has reported that low levels of liquidity will continue to 

exist, absent legislative actions by Congress.

4 Under the prefunding mechanism established by PAEA, as implemented by the Office of 

Personnel Management (OPM), USPS payments to OPM would be projected to fund the 

liability over a period in excess of 50 years, from fiscal years 2007 through 2056 and 

beyond (with rolling 15-year amortization periods after 2041). PAEA established “fixed” 

prepayment amounts—meaning that the amounts were set by statute and did not vary 

with actuarial measurements of the cost of the benefits—in the first 10 years, from fiscal 

years 2007 through 2016, with actuarially determined payments thereafter. However, the 

payments required by PAEA were significantly “frontloaded,” with the fixed payment 

amounts in the first 10 years exceeding what actuarially determined amounts would have 

been using a 50-year amortization schedule. According to OPM, as of Sept. 30, 2012, 

USPS’s liability for retiree health benefits was $93.575 billion and the PSRHBF balance 

was $45.744 billion, with a resulting unfunded liability of $47.831 billion. For more detail, 

see GAO-13-112.

5 Pub. L. No. 112-74, § 632, 125 Stat. 786, 928 (Dec. 23, 2011).

Funding Postal 

Retiree Health 

Benefits
Page 4 GAO-13-872T

We have previously reported that Congress needs to modify USPS’s 

retiree health benefit payments in a fiscally responsible manner.6

Key considerations for Congress regarding the requirements for funding 

postal retiree health benefits include the following:

Further,

we also stated that USPS should prefund any unfunded retiree health 

benefit liability to the maximum extent that its finances permit. Deferring 

funding for postal retiree health benefits could increase costs for future 

ratepayers and increase the risk that USPS may be unable to pay for 

these costs.

• Trade-offs regarding USPS’s current financial condition and long-term 

prospects: One of the rationales for prefunding retirement benefits is 

to protect the future viability of the organization by paying for 

retirement benefits as they are being earned, rather than after 

employees have already retired. However, USPS currently lacks 

liquidity and postal costs would need to decrease, or postal revenues 

to increase, or both, to fund required payments for prefunding retiree 

health benefits. To the extent prefunding payments are postponed, 

larger payments will be required later, when they likely would be 

supported by less First-Class Mail volume. No prefunding approach 

will be viable unless USPS can make the required payments.

• Fixed versus actuarially determined payments: The retiree health 

benefits payment schedule established under PAEA was significantly 

frontloaded, with total payment requirements through fiscal year 2016 

that were significantly in excess of what actuarially determined 

amounts would be.

• Possible consequences to USPS employees and retirees: Funded 

benefits protect against an inability to make payments later, make 

promised benefits less vulnerable to cuts, and reduce the risk that 

employee pay and benefits may not be sustainable and could be 

reduced.

• Allocating costs between current and future ratepayers: Deferring 

payments until later can have the effect of passing costs from current 

to future postal ratepayers. One of the rationales for prefunding is for 

current ratepayers to pay for retiree health benefits being earned by 

 6 GAO-10-455.
Page 5 GAO-13-872T

current employees. The appropriate allocation of costs among 

different generations of postal ratepayers is complicated by what 

might be called the “legacy” unfunded liability that was not paid for in 

prior years.

• Funding targets: We have expressed concern about a proposed 80 

percent funding target for postal retiree health benefits that would 

have the effect of carrying a permanent unfunded liability equal to 

roughly 20 percent of USPS’s liability, which could be a significant 

amount.7 If an 80 percent funding target were implemented because 

of concerns about USPS’s ability to achieve a 100 percent target level 

within a particular time frame, an additional policy option to consider 

could include a schedule to achieve 100 percent funding in a 

subsequent time period after the 80 percent level is achieved.

We recently reported on USPS’s proposal to create a postal health care 

plan outside of FEHBP.8 This proposal would offer health care coverage 

to postal employees and retirees (about 1 million of whom currently

participate in FEHBP).9

USPS’s proposed health care plan is designed to increase postal retirees’

enrollment in Medicare as well as take advantage of Medicare subsidies 

Under this proposal, initial benefits and postal 

employees’ and retirees’ share of premiums would first be established by 

USPS and subsequently, for union-covered employees, in collective 

bargaining.

 7 For example, USPS’s retiree health benefit liability at the end of fiscal year 2012 was 

$93.6 billion. Twenty percent of that is $18.7 billion.

8 See GAO-13-658. Since this report was issued, USPS has discussed other options for a 

new USPS health plan that would be offered within FEHBP.

9 The term “retirees” is used to refer to postal annuitants or any survivors of postal retirees 

who receive health benefits.

USPS’s Proposed 

Health Plan Outside 

of FEHBP
Page 6 GAO-13-872T

for employer-based prescription drug plans.10 Specifically, it is designed 

so that all Medicare-eligible retirees would enroll in Medicare Parts A and 

B, with Medicare acting as the primary insurer for those enrollees and the 

USPS plan paying costs above what Medicare would cover for current 

retirees.11

We have reported that USPS would likely realize large financial gains 

from its proposed health care plan. According to USPS’s estimates, 

USPS would reduce its health benefits expenses and eliminate its 

unfunded retiree health benefit liability, primarily by increasing the use of 

Medicare by postal retirees once they are eligible for Medicare generally 

beginning at age 65. USPS estimated that its plan would reduce its retiree 

health benefit liability by $54.6 billion, with the increased use of Medicare 

accounting for most of this reduction. USPS also estimated that the plan 

would reduce its total annual required health care payments by $7.8 

billion in the first year of implementation and by $33.2 billion over the first 

5 years of implementation. In addition, some of the elements of the 

proposal—notably an option to allow USPS to invest health plan funds 

outside of Treasury securities, such as in stocks, commodities, and 

USPS’s proposed plan would include prescription drug benefits 

that qualify it to receive a federal subsidy and drug discounts under 

Medicare Part D. Under one USPS option for funding this plan, USPS 

proposes that it would be authorized to invest plan assets without the 

approval of the Secretary of the Treasury in non-Treasury securities, such 

as stocks and bonds, as well as commodities, foreign currency, and real 

property. (See app. I for more information on the USPS proposed health 

plan.)

 10 Medicare is the federally financed health insurance program for persons age 65 or over, 

certain individuals with disabilities, and individuals with end-stage renal disease. Medicare 

Parts A and B are known as Medicare fee-for-service. Medicare Part A covers hospital 

and other inpatient stays. Medicare Part B covers hospital outpatient, physician, and other 

services. Medicare beneficiaries have the option of obtaining coverage for Medicare 

services from private health plans that participate in Medicare Advantage—Medicare’s 

managed care program—also known as Part C. All Medicare beneficiaries may purchase 

coverage for outpatient prescription drugs under Part D, either as a stand-alone benefit or 

as part of a Medicare Advantage plan.

11Postal employees pay Medicare taxes and therefore may become eligible for Medicare 

coverage generally at age 65. Eligible retirees are not required to enroll in Medicare. As 

of the end of 2011, about 8 percent of Medicare-eligible postal retirees were not enrolled 

in Medicare Part A and 22 percent were not enrolled in Medicare Part B—slightly lower 

than the nonpostal FEHBP population, of which 11 percent and 25 percent did not enroll in 

Parts A and B, respectively.
Page 7 GAO-13-872T

foreign currency—would add uncertainties that could reduce funds 

available for its employees’ and retirees’ future health care.

We have reported that under USPS’s health care plan as designed for 

year one, postal employees and retirees would have coverage for a 

similar package of services as under selected FEHBP plans, and the level 

of coverage would be similar for many services, with some exceptions 

(e.g., services received outside of USPS’s approved network). We 

estimated that, had the proposed USPS plan been implemented in 2013, 

most employees and retirees would have had similar or lower premiums 

compared to selected FEHBP plans; but total costs—premiums and costs 

for the use of care—could be higher for some.

We have also reported that withdrawing the approximately 1 million USPS 

employees and retirees from FEHBP, which would be required under 

USPS’s proposal, would reduce FEHBP’s enrollment by an estimated 25 

percent.12

As Congress considers proposals for a USPS health care plan, it should 

weigh the impact on Medicare as well as other issues, including 

establishing safeguards for plan assets and ensuring FEHBP-comparable 

protections for plan participants. The primary policy decision for Congress 

to make with respect to such proposals is whether to increase eligible 

postal retirees’ use of Medicare. USPS projects that its plan would 

increase Medicare spending by an average of $1.3 billion per year over 

the first 5 years of its plan—about 0.2 percent of Medicare’s annual costs 

of more than $550 billion. Our report also noted that Medicare is on a 

fiscally unsustainable path over the long term. A USPS health plan that 

Despite the significant change in enrollment, most nonpostal 

enrollees would likely not be affected by a USPS withdrawal beyond what 

selected FEHBP plan representatives expect to be small increases or 

decreases in premiums. However, USPS’s withdrawal could lead the 

small number of FEHBP plans with primarily postal enrollment to 

withdraw from the program. For example, if the 4 plans with 70 percent or 

more postal enrollment discontinue participation in FEHBP under a USPS 

withdrawal, an estimated 1 percent (about 29,000) of the approximately 3 

million nonpostal enrollees in FEHBP would need to select a new health 

plan.

 12 Our estimates of enrollment changes used data on enrolled contracts, not the number 

of covered lives.
Page 8 GAO-13-872T

would add costs to Medicare would have to be weighed alongside the 

fiscal pressure already faced by Medicare.

If Congress decides to move forward with USPS’s proposed health plan 

as part of a broader reform package, we have identified other important 

policy issues that also should be addressed. Specifically, Congress 

should consider:

• safeguards for USPS health plan fund assets by placing appropriate 

constraints on their asset allocations (for example, limiting 

investments to Treasury securities, including inflation-indexed 

Treasury securities; or, to the extent that more risky assets are 

permitted, using a conservative approach to setting the prefunding 

discount rate);

• standards for the disposition of any surplus health plan assets that 

reduce the risk of a new unfunded liability emerging in the future (for 

example, standards for amortizing any surplus to mirror the 

amortization of any unfunded liability);

• designation of an independent entity responsible for selecting 

actuarial assumptions used to determine the health plan’s funded 

status; and

• protections for postal employees and retirees that are comparable to 

those under FEHBP, including a formula for retirees’ contribution to 

health costs.

USPS had an estimated FERS surplus of $3.0 billion at the end of fiscal 

year 2012, according to the Office of Personnel Management (OPM), and 

OPM will be calculating an updated estimate for the end of fiscal year 

2013. USPS has reported an estimate that its FERS surplus would have 

been substantially larger if its FERS liability had been estimated using 

postal-specific demographic and pay increase assumptions.13

 13 United States Postal Service, 2012 Report on Form 10-K (Washington, D.C.: Nov. 15, 

2012) 37.

USPS has 

stated that it believes, as a matter of equity, its FERS liability should be 

estimated using USPS-specific pay increase and demographic 

The Potential FERS 

Surplus
Page 9 GAO-13-872T

assumptions instead of government-wide pay increase and demographic 

assumptions. As we have reported, legislation would be needed to return 

to USPS any FERS surplus.14

As we also have reported, we would support a remedy to the asymmetric 

treatment of FERS surpluses and deficits under current law.15

Key issues for Congress to consider in connection with the potential 

USPS FERS surplus include:

A 

conservative approach to permit USPS to access any FERS surplus 

would be to use it to reduce USPS’s annual FERS contribution by 

amortizing the surplus over 30 years (which would mirror the legally 

required treatment of deficits). A second approach would be to reduce 

USPS’s annual FERS contribution by offsetting it against the full amount 

of surplus each year until the surplus is used up; this would be 

comparable to what occurs for private-sector pension plans. We have 

previously suggested that any return of the entire surplus all at once 

should be done with care. A one-time-only return of the entire surplus 

should be considered as a one-time exigent action only as part of a larger 

package of reforms and restructurings. Otherwise, returning surpluses 

whenever they develop would likely eventually result in an unfunded 

liability.

• Fluctuations in estimated liabilities: Estimates of liabilities for 

retirement benefits contain a significant degree of uncertainty and can 

change over time.

• Whether to use USPS-specific assumptions to measure USPS’s 

FERS liability: We support using the most accurate numbers possible.

If USPS-specific assumptions are used in estimating USPS’s FERS 

liability, we suggest that they also be used in estimating USPS’s 

CSRS and retiree health liabilities. We suggest that if USPS-specific 

assumptions are to be used, that the assumptions be recommended 

by an independent body (such as OPM’s Board of Actuaries).

 14 GAO-12-146.

15 GAO, Responses to Questions for the Record; Committee on Homeland Security and 

Governmental Affairs, February 13, 2013, Hearing on "Solutions to the Crisis Facing the 

U.S. Postal Service" (Washington, D.C.: Apr. 5, 2013). Under current law, USPS must 

fund towards any FERS deficit but does not benefit from any FERS surplus. See 

GAO-12-146, p. 37.
Page 10 GAO-13-872T

• Other liabilities: While USPS had an estimated FERS surplus of $3.0 

billion dollars at the end of fiscal year 2012, it had an estimated CSRS 

deficit of $18.7 billion at the same time. Both estimates could change 

if USPS-specific assumptions are used. In addition, as noted earlier in 

Table 1, USPS also has an unfunded liability for retiree health benefits 

and liabilities for workers’ compensation and its debt to Treasury, for a 

total of $96.1 billion of liabilities and unfunded benefit liabilities.

__________________________________________________________

In closing, we continue to believe that a comprehensive package of 

legislative actions is needed so that USPS can achieve financial viability 

and assure adequate benefits funding for more than 1 million postal 

employees and retirees. Chairman Carper, Ranking Member Coburn, and 

Members of the Committee, this concludes my prepared statement. I 

would be pleased to answer any questions that you may have at this time.

For further information about this statement, please contact Frank 

Todisco, Chief Actuary, FSA, MAAA, EA, Applied Research and Methods, 

at (202) 512-2834 or todiscof@gao.gov; or John E. Dicken, Director, 

Health Care at (202) 512-7114 or dickenj@gao.gov. Mr. Todisco meets 

the qualification standards of the American Academy of Actuaries to 

render the actuarial opinions contained in this testimony regarding the 

measurement issues, funding issues, and risks associated with pension 

and retiree health care obligations. Contact points for our Congressional 

Relations and Public Affairs offices may be found on the last page of this 

statement. In addition to the contacts named above, Lorelei St. James, 

Director, Physical Infrastructure Issues; Teresa Anderson; Susan 

Barnidge; Kenneth John; Jaclyn Nelson; Kristi Peterson; Steve Robblee; 

Friendly Vang-Johnson; Betsey Ward-Jenks; and Crystal Wesco made 

important contributions to this statement.

GAO Contact and Key 

Acknowledgments
Appendix I: Key Elements of the Proposed U.S. 

Postal Service Health Care Plan

Page 11 GAO-13-872T

Element Description 

100% participation of eligible retirees in 

Medicare Parts A and B 

The U.S. Postal Service’s (USPS) plan is designed so that all Medicare-eligible retirees 

would enroll in Medicare Parts A and B. Those who do not enroll would have their 

benefits reduced by the amount Medicare would have paid had the individual enrolled. As 

is the case under the Federal Employees Health Benefits Program (FEHBP), Medicare 

would serve as the primary payer of health care costs, and for existing retirees, the USPS 

plan would cover 100 percent of any costs above the amounts covered by Medicare Parts 

A and B. 

Prescription drug benefits that qualify the 

plan for federal subsidies and drug 

discounts 

USPS would design the prescription drug benefits under its plan to qualify as an 

Employer Group Waiver Plan (EGWP) under Medicare Part D. This would qualify USPS 

to receive—for those eligible for Medicare—a federal subsidy from the Medicare program 

for drug costs, a discount from pharmaceutical companies for brand name drugs, and 

federal coverage for drug costs above a catastrophic limit. 

Introduction of two new tiers of coverage The proposed plan would include four coverage tiers: self only, self and spouse, self and 

children, and self and family. Premiums for each tier would be set according to the claims 

experience of the group. USPS’s proposed addition of two tiers (self and spouse and self 

and children) to the options available under FEHBP would be to reflect the various stages 

of family status that participants may experience over the course of their career and 

retirement. 

Purchasing plan administration services 

from a single vendor through a competitive 

bidding process 

USPS would contract with a single vendor to administer its plan; that vendor would 

negotiate with providers for payment rates, process claims, and provide wellness and 

disease management programs. 

Requirement that future retirees be 

subject to plan deductibles and costsharing upon enrolling in Medicare 

For employees retiring a year or more after the USPS plan becomes effective (i.e., “future 

retirees”), Medicare would be the primary insurer once the enrollee becomes eligible, and 

the USPS plan would cover costs above what Medicare pays. However, future retirees 

would be required to meet the USPS plan deductible and pay coinsurance. 

USPS Health Benefits Fund Under one option of USPS’s proposal (which USPS refers to as “Scenario 2”),a its health 

plan would be financed by a newly created fund called the Health Benefits Fund (HBF) 

that would include: (1) the entire Postal Service Retiree Health Benefits Fund that would 

be abolished upon its transfer to the HBF; (2) the balance of the fund that finances 

FEHBP allocable to contributions by USPS, postal employees and retirees, including any 

reserve fund amounts; (3) USPS contributions under its health plan; (4) contributions of 

postal employees and retirees under the USPS health plan; (5) any interest on HBF 

investments; (6) any other USPS receipts allocable to the USPS health benefits plan; and 

(7) appropriations based on the service of officers and employees of the former U.S. Post 

Office Department.

Under its proposal, USPS would be authorized to invest HBF assets without the approval 

of the Secretary of the Treasury in non-Treasury securities, such as stocks and bonds, as 

well as commodities, foreign currency, and real property. Also, USPS indicates that HBF 

assets could not be used for (1) loans to USPS, such as to enable it to remain solvent; (2) 

USPS payments to the federal government, such as for pensions and workers’

compensation; or (3) to finance USPS investments or USPS nonpostal initiatives to 

generate revenue.

In any year when the amount of HBF assets exceeds USPS’s estimated actuarial liability 

for retiree health benefits, USPS could authorize the surplus amount to be transferred to 

the Postal Service Fund that finances most USPS expenses, provided that such 

authorization is made pursuant to a recommendation by a majority of the Committee 

overseeing the HBF. 

Appendix I: Key Elements of the Proposed 

U.S. Postal Service Health Care Plan
Appendix I: Key Elements of the Proposed U.S. 

Postal Service Health Care Plan

Page 12 GAO-13-872T

Element Description 

USPS funding of retiree health benefits USPS would continue to prefund retiree health benefits, but under a purely actuarial 

approach, without the fixed (non-actuarial) payments required under current law through 

2016. Payments to the HBF would be based on the “normal cost” and amortization of any 

unfunded liability or surplus of its retiree health care liabilities over an amortization period 

ending at the later of 40 years after implementation or 15 years from the then-current 

year. 

Source: GAO analysis of USPS information.

a

USPS has also proposed another option for financing its health plan (which USPS refers to as 

“Scenario 1”) under which retiree health benefits would continue to be financed from the Postal 

Service Retiree Health Benefits Fund (PSRHBF).

(544200)
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